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Author: synchronicityII Big funky green star, 20000 posts Top Favorite Fools Top Recommended Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 76418  
Subject: Re: Wade Pfau: 3% is the new 4% SWR? Date: 3/8/2014 12:55 PM
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I'd read comments about Wade Pfau's research in other venues, as well as (IIRC) at least one other "well-respected" author in the arena, racheting down the 4% SWR. Their objections seemed to mainly be tied to "well, investments are overpriced and likely to perform worse going forward" (either lower absolute returns and/or higher volatility).

Well, duh. Yes, if you assume that stuff will do worse and/or be more volatile in the future than in the past, a 4% SWR won't work like it did in the past. Thank you Captain Obvious.

I also got a lecture from someone on another forum who was espousing a lower initial SWR that increased as one aged, something like the RMD rules (which they felt compelled to explain to me, because Lord Knows I don't understand RMDs [*eyeroll*]). Again, DUH, I tried to explain that the SWR is a quick "rule of thumb" used to guesstimate absolute asset amount needed for retirement, that although there's some sorta-sophisticated math behind arriving at that it's a general number based on a common retirement scenario (age 65ish, roughly 30 years assumed remaining lifespan, assume set amount needed for lifestyle of X and increase that for inflation to maintain the same lifestyle throughout lifespan). If one REALLY wanted to get more specific, there were other ways one could handle it. SWR is really just a "safe harbor" rule as it assumes a low probability of failure given a straight line pull of assets.

I then got a lecture about how an increasing percentage is more efficient across various years because yadda yadda yadda. I started to get into the concepts about how some people might want to spend more money (inflation adjusted or whatever) at age 65 than at age 85 because hey, probably a bit healthier/better able to do things at the one age than the other, about how the goal of retirement might not be to spend every last penny, about how the option to spend more than an "inflation adjusted" amount if portfolios return better than a "worst case" example is always available, and so on. I then was rebuked about how "so, you people who espouse 4% SWR don't even REALLY mean it", which showed that the whole point of SWR was missed. (It's a SAFE withdrawal rate, people!)

Most of the "research" knocking the 4% SWR seems focused on "well, sure, 4% MIGHT work, but if you assume worse assumptions than it's more likely it won't, so use a lower starting percentage". Gee, thanks for the tremendous insight. All of the "it's not the most optimal way to spend your retirement money" shows that people don't get what an SWR rule is aimed at.

Alternatively "if your investments do better, you can take out more in subsequent years than just an inflation adjusted amount". REALLY?!?! Wow, that idea NEVER OCCURRED TO ME! Gee, if my investments took off or I won the lottery at age 66, I'd NEVER think to increase my spending above the rate of inflation! Thank you for that! *eyeroll*

All that said...I work in the financial services industry. There are a LOT of people who can't grok much of the math needed to plan well (much less understand the interplay of the tax laws and whatnot). For them, paying a fee for a financial planner to help them makes sense. It's also not JUST about math and retirement planning - for many people estate planning (not just "estate tax" issues, which almost nobody reading this board will have to deal with at the federal level but maybe at the state) is an issue, understanding the tax laws well, transferring assets to children, all that is important and is not in most people's bailiwick. I get that there are many financial advisers out there who aren't great at it either, but at least some of them may be able to work with some sort of "Planning Department" and access the expertise to assist people with issues. Yes, you can (and probably should) have your own attorneys/accountants to work with, especially if you're approaching the level of, say, having to worry about federal estate taxes (that's 8 digit net worth, NOT counting the 2 after the decimal point).

As with everything, the question becomes "is the fee/price worth it for the service/benefit I'm receiving?" As Health Ledger's Joker character said in the movie The Dark Knight: "if you're good at something, never do it for free". I could probably learn to fix my own car if I invested the time/effort into it, and it's probably not THAT hard, but it's not the best use of my time so I pay a mechanic to do so. Of course, I try and find one I can trust and who charges a reasonable amount.

Long winded rant. TL/DR version - a lot of articles about retirement are complex ways of saying "if things change, 4% won't work". Duh. Financial advisors charge fees and some products have fees, so if you can "do it yourself" it's better, but a lot of people aren't great at "do-it-yourself" so financial advisers make sense. Normal caveat - like car mechanics, there are a lot out there who charge too much and deliver too little and seem more interested in enriching themselves than helping you for a fair price.

Disclosure - as noted, I work in financial services, specifically for an insurance company. Insurance companies offer products and services, many of which have various fees. One could claim I'm "biased" in favor of such products and services given where I work. My comments would remain, for ANY financial product/service/advice/whatever, to do research yourself as much as you can, consult with varying people to learn more about offerings from various sources, and then choose the path that best fits your needs given your skillset and commitment. This may be largely a do-it-yourself approach, or may involve paying others in various ways. The fact that something "has a fee" does not necessarily make it "bad", but obviously does make that a cost that should provide a commensurate benefit in your planning. I wouldn't pay an accountant a bunch of money to do a 1040EZ for me, but I likely would pay them a fair amount to prepare my 1040 if it was somewhat complex. Your funds, your choices.

-synchronicity, long winded

Circular 230 Disclaimer - none of this is tax advice, I'm not your attorney, talk to your own and don't think telling the IRS "I read something posted on the intermawebz" is going to help you if they audit you.

Additional disclaimer - all comments in this post are mine alone and do not reflect any opinion or view of my employer. Any of teh stoopid posted above reflects my own dumbedness. I take full responsibility for being a clueless dolt at least part of the time.
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